The Price of Civilization

Like many Americans, I looked to Barack Obama as the hope for a breakthrough. Change was on the way, or so we hoped; yet there has been far more continuity than change. Obama has continued down the well-trodden path of open-ended war in Afghanistan, massive military budgets, kowtowing to lobbyists, stingy foreign aid, unaffordable tax cuts, unprecedented budget deficits, and a disquieting unwillingness to address the deeper causes of America’s problems. The administration is packed with individuals passing through the revolving door that connects Wall Street and the White House.

-Sachs, Jeffrey D. (2011-10-04). The Price of Civilization: Reawakening American Virtue and Prosperity (Kindle Locations 62-66). Random House. Kindle Edition.

Thinking Fast and Slow

In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities—and also the faults and biases—of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation—each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

Chile's Economic and Social Challenges

Panelists included:
- Guillermo Calvo, Professor of Economics, SIPA,
- John Dinges, Professor of Journalism, CJS
- Nelson Fraiman, Director, Program on Entrepreneurship & Competitiveness in Latin America
- Nara Milanich, Professor of History, Barnard College
- Miguel Urquiola, Associate Professor of Economics, SIPA

Book Recommendation on Health Care Reform

A Sneak Peek At ‘Health Reform: The Comic Book;

I think Mitt Romney is the hero of this story. But I want to make clear that the way he’s portrayed in this book has nothing to do with his presidential campaign. Mitt Romney is the single person most responsible for health care reform in this country: Without his leadership we don’t get reform in Massachusetts, and without Massachusetts reform we don’t get national reform.

Krugman's History of Macro

So, here’s the history of macro in brief.

1. In the beginning was Keynesian economics, which was ad hoc in the sense that on some important issues it relied on observed stylized facts rather than trying to deduce everything from first principles. Notably, it just assumed that nominal wages are sticky, because they evidently are.

2. In the 1960s a number of economists started trying to provide “microfoundations”, deriving wage and price stickiness from some kind of maximizing behavior. This early work had a big payoff: the Friedman/Phelps prediction that sustained inflation would get “built in”, and that the historical tradeoff between inflation and unemployment would vanish.

.....

7. The Lesser Depression arrives. It’s clearly not a technological shock; clearly, also, nobody is confused about whether we’re in a slump, as the old Lucas model required.

In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.

Related: Stephen Williamson debates Krugman.

Confidence Men

Brad de Long reviews Confidence Men;

Since the spring of 2009 I have became more and more alarmed by the economic policy choices made by the Obama administration. A new administration needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen, The Obama administration did that. I think that some of its initial policies were wrong, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter, however, things to me seemed to gradually fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.
It needs to ask itself:

• What if we are wrong in our estimation of the situation--what might the world then look like three years from now? 

• What if more things go wrong in the next year or two--what might the world then look like three years from now?
• In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?
  
  ....

Why Obama chose the policies he did, why Geithner and Orszag and company were so optimistic in 2009, why the Reconciliation process was not teed up for emergency expansionary fiscal policy action if it turned out to be necessary, why Fannie and Freddie were not teed up for emergency mortgage action if it turned out to be necessary, why the administration turned so decisively away from unemployment and toward long-term deficit reduction in early 2010, why Summers and Romer did not wipe the floor with Geithner and Orszag in the long twilight bureaucratic struggle when NEC collegiality broke down, and why Bernanke forgot about the employment and output part of the Federal Reserve's dual mandate - these are all questions that I would dearly love to know the answers to.

Two and a half years ago I would have given long odds that Ron Suskind's book would provide me with a lot of the answers to these questions.

It does not.

What Steven Landsburg been reading

It's all fiction

;

The Brothers Karamazov (Fyodor Dostoevsky) (for the fourth time!). Arguably the greatest novel ever. The issue with the Brothers K is always the choice of a translation. The last time around (maybe ten years ago or so), I went with Pevear and Volokhonsky, and pronounced it by far the best. This time I went back to the classic Constance Garnett translation that I last read at age 16 — and reminded myself that this one is also great.

Alan Krueger to replace Austan Goolsbee

Mr. Krueger has been on Princeton's faculty since 1987, the year he earned his Ph.D. in economics from Harvard University. He did a stint as chief economist at the Labor Department during the Clinton administration.

The work he has done in academia ranges from attempts to explain why job growth wasn't stronger during the 2000s, to findings that increases in the minimum wage don't depress employment, to a work showing that terrorists often come from middle-class—and often college-educated—backgrounds.

While at Treasury, Mr. Krueger worked on analyses of a variety of programs, including tax incentives to encourage employers to hire the employed, the "cash for clunkers" initiative to jump-start auto purchases and Build America taxable municipal bonds.

Treasury Secretary Timothy Geithner, through a spokeswoman, said that "given his expertise in labor economics, he is precisely the right choice to lead the CEA at this moment in history."

Martin Feldstein, who was CEA chairman in the Reagan White House, praised the choice. "His experience at the Treasury will give him a running start in his new job," he said. "Alan is an expert in labor-market problems, taxation and the economics of terrorism. I hope the president listens to him."

-Labor Economist to Fill Key Post

Leon Levy Lecture - The Lot of the Unemployed

A closer look at Alan Krueger’s academic work;

The minimum wage: Krueger might be most famous for the paper he did with David Card back in 1992 showing that an increase in the minimum wage doesn’t always increase unemployment, as most economists had long believed. Krueger and Card compared fast-food restaurants in New Jersey and western Pennsylvania and found that New Jersey, which had hiked its minimum wage from $4.25 to $5.05, didn’t lose jobs as expected. In fact, in some conditions, an increase in the minimum wage can actually boost employment. As Robert Waldmann explains, “Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly.” That said, Waldmann adds, this research doesn’t appear to be relevant to current labor-market conditions.

Unemployment: In 2011, Krueger and Andreas Muller conducted a survey of 6,025 unemployed workers and found a couple of interesting things. One, “the amount of time devoted to job search declines sharply over the spell of unemployment.” Second, out-of-work job-seekers tend to be picky: The minimum wage a worker will accept tends to be pretty close to the wage of his previous job, and it doesn’t drop very much over time, even if he stays unemployed.

Krueger to CEA

Vijay Kelkar- A Practitioner in Indian Economic Policy

Vijay Kelkar's is a fascinating story in Indian public policy. He started out as an economics Ph.D. and turned himself into a consummate policymaker. While he did many interesting things in the field of oil and gas, and as executive director of the IMF, I worked with him in his fiscal phase...

...I used to get astonished at the way Kelkar, who is 20 years older than me, consistently found the energy and morale to go back into the fray again and again, chipping away at solving long-standing problems. This also taught me that while weary cynicism is a more fashionable pose, progress is only achieved through the dint of boundless optimism.

Practical people are often dismissive of the world of ideas, but that is not the Kelkar that I have known. For one thing, he made a point of reading the current global research in economics on an astonishing scale. I have been frequently humbled in finding that his knowledge of the current literature was better than mine. I suspect his years at the IMF were very useful in tooling him up in modern open economy macroeconomics, which is often a gap in the knowledge of those who experienced a closed India in their formative years. Kelkar has always encouraged me, saying that in an open society, ideas matter, so it was important to build good ideas, and to push important messages out in the public domain, even when this makes many people uncomfortable.

via Ajay Shah

Where are they now- Susan Athey

She's now the Chief Economist for Microsoft

A summary of her research areas

Economics 1056: Market Design- an undergraduate course on Market Design taught by Athey

'Economics is a set of problems in need of solution'

A highly recommended column from John Kay;

The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics. Macroeconomics deals with growth and business cycles. Its dominant paradigm is known as “dynamic stochastic general equilibrium” (thankfully abbreviated to DSGE) – a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households...

As late as 2007, the International Monetary Fund would justify its optimism about the macroeconomic outlook with the claim that “developments in the global financial system have played an important role, including the ability of the United States to generate assets with attractive liquidity and risk management features”...

In his presidential lecture to the American Economic Association in 2003, Robert Lucas of the University of Chicago, the Nobel prizewinning doyen of modern macroeconomics, claimed that “macroeconomics has succeeded: its central problem of depression prevention has been solved”. Prof Lucas based his assertion on the institutional innovations noted by Mr Greenspan and the IMF authors, and the deeper theoretical insights that he and his colleagues claimed to have derived from models based on DSGE and the capital asset pricing model....

Subsequent policy decisions have been pragmatic and owe little to any economic theory. The recent economic policy debate strikingly replays that after 1929. The central issue is budgetary austerity versus fiscal stimulus, and – as in the 1930s – the positions of the protagonists are entirely predictable from their political allegiances.

Why did the theories put forward to deal with these issues prove so misleading? The academic debate on austerity versus stimulus centres around a property observed in models based on the DSGE programme. If government engages in fiscal stimulus by spending more or by reducing taxes, people will recognise that such a policy means higher taxes or lower spending in the future. Even if they seem to be better off today, they will later be poorer, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. This property – sometimes called Ricardian equivalence – implies that fiscal policy is ineffective as a means of responding to economic dislocation...

Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game...

What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics...

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

Related:
How Did Economists Get It So Wrong?

Lucas- Noble Prize Lecture

In Defense of the Hedgehogs

Michael Spence - the world is good hands, the chinese

Eminent Economists- Vernon Smith on Bubbles

Book Recommendations for Public Finance Practitioners

Chipping Away at Public Debt—Sources of Failure and Keys to Success in Fiscal Adjustment

Economic Policy-Theory and Practice Agnès Bénassy-Quéré, Benoît Coeuré, Pierre Jacquet and Jean Pisani-Ferry
Government versus Markets
The Changing Economic Role of the StateVito Tanzi

Rodrik Talk at the World Bank- 'a liberal mugged by globalization'

Development Economics Lecture Series: Prof. Dani Rodrik from World Bank on Vimeo.

A few years ago we were in El Salvador, an economy which has done a tremendous amount in terms of liberalizing its economy, privatizing, stabilizing. Nothing essentially wrong that you can point to in terms of the contractual legal environment. It wasn't the government that was just hell-bent on taxing everything. Quite the opposite. And nothing except for garments had taken off; and garments had taken off because of some special trade privilege in the U.S. market, but nothing except for that. You ask people: If I give you $25 million, what would you invest in in the Salvadorian economy, and they would think about it a little bit and then they would say: Well, can I put it in Miami? Do I have to invest in El Salvador? That's the kind of economy where, when you don't see any Schumpeterian rents--we forget. When we think about Schumpeterian rents, we think it's just about rich countries. Rich countries: Schumpeterian rents are important for innovators, because they get a new product and they need to ensure they have at least some profits from investing in those high risk activities. But in developing countries too there are unique Schumpeterian rents for investors willing to go into new areas, new industries. Capital likes to get a return. Exactly. And when it's risky and when there are huge spillovers to the rest of the economy, the private return is going to be way below what the social return is, so you are not going to get the right kind of transformation. In that kind of a setting it's not government failure that's blocking transformation. It's just a bunch of market failures associated with low levels of income. And there you do want the government to come in and actually do some stimulating

-from the podcast interview on Econ Talk


Structural Change, growth and jobs


Freedom and the Global Economy

Advice to a Young Statistician

He had grown up with numbers. “My dad
was a truck driver and salesman and a good
amateur athlete. He kept score for the baseball
leagues and the bowling teams, stuff like that,
and because of that I grew up with numbers
around me. He liked doing math – not puzzles,
just numbers.

“And so I grew up always thinking I was
going to be a mathematician or something like
that. I’d get books out of the library – Maths
for the Million, that kind of thing.” He got a
scholarship to Caltech. “I got a real break there.
That was the first year they offered the scholarship,
and but for that I couldn’t have gone.” It
was evidently a remarkable family: all four of
the Efron siblings became academics. “My dad
gave us this pretty clear picture that we weren’t
suited for heavy work.”..

Bayesian methods are fine, but if you get too far into Bayesian
methods you quit thinking about inference because it all becomes automatic

Statisticians work at two basic levels. They can develop statistical methods, like linear models, or they can prove things about inference properties. The first is the one that makes you wildly popular with
people who use statistics for their work; I like to work at the second level.

In some ways I think that scientists have misled themselves into thinking that if you collect enormous amounts of data you are bound
to get the right answer. You are not bound to get the right answer unless you are enormously smart. You can narrow down your questions; but enormous sets of data often consist of enormous numbers of small sets of data, none
of which by themselves are enough to solve the thing you are interested in, and they fit together in some complicated way.

-Interview with Brad Efron (Stanford statistics professor)

Blog of the Day- An Economist a Day

Viewing the world through the lens of financial economics

Book Recommendation

Perfecting Parliament
Constitutional Reform, Liberalism, and the Rise of Western Democracy
Roger D. Congleton, George Mason University

Kaushik Basu talk

The Joys of Stats